Report addresses flood protection's unseen costs

Wednesday

Sep 11, 2013 at 10:28 PM

Resolving the National Flood Insurance Program’s billions of dollars of debt is said to be the goal of current reforms, but local officials complain that burden is being placed unfairly on consumers without consideration of the program’s unseen costs.

Xerxes Wilson Staff Writer

Resolving the National Flood Insurance Program’s billions of dollars of debt is said to be the goal of current reforms, but local officials complain that burden is being placed unfairly on consumers without consideration of the program’s unseen costs. A recent report from Greater New Orleans Inc., a New Orleans-based economic development group, notes this disparity through public records obtained from the Federal Emergency Management Agency. From the program’s inception to 2012, $44.72 billion has been paid into the program. During the same period, $44.71 billion in claims have been paid out — leaving the program $132 million in the black considering only those factors. Historically however, about $19 billion has been spent on areas other than claims. These costs include operating expenses for the program, interest and commissions. Historic figures do not include some $8 billion in losses projected for Hurricane Sandy. Reforms to the government-run flood insurance program overseen by FEMA have some property owners facing 5,000 percent increases to their annual costs for flood insurance, which is required for most mortgages. Local officials fear the reforms could result in many residences being abandoned. The reforms are dictated by the Biggert-Waters Act Congress approved last year. Most debates over the the program boil down to fair costs. On one side, there are taxpayers who feel they are unfairly subsidizing insurance costs for those who chose to live in hazardous areas. Local officials characterize the reforms as a broken promise of affordable flood insurance made when homeowners built to FEMA’s required codes. The primary motivator for the reforms is the program’s projected $24 billion debt following the hurricanes of the past decade. “It creates the moral hazard of a risk to continue building in high-risk areas with the expectations that this will continue and therefore jeopardizing taxpayer funds,” said U.S. Sen. Pat Toomey, R-Pa., speaking during an effort to delay the reforms. “This is a program that is already $24 billion in debt.”Local officials have taken offense to that number and argue the amount of money paid in during the program’s four-decade history surpasses the total amount of claims paid out. About 44 percent of the money paid into the program went toward payment of claims in 2012, the Greater New Orleans Inc. report says. Operating expenses accounted for 9 percent of the program’s costs that year. The second largest portion, 30 percent, went toward commissions and servicing costs. These commissions and servicing costs mostly go toward insurance agent commissions, a point the report takes issue with. “Considering that the insurance companies carry zero risk, should their payment be 30 percent of every premium, every year?” the report states. “It is not like people have any other option to get their insurance,” said Parish President Michel Claudet. “Insurance companies have to spend no money on advertising. They don’t have to incentivize your agents the way you would generally. Obviously, I just do not see a reason to have to pay that much commission on basically a one-source outlet.”North Lafourche Levee District Director Dwayne Bourgeois argued that reforms unfairly seek only higher rates for coverage. “Out of consumers, insurance companies and FEMA, the only people that have to take a haircut on this are the consumers,” Bourgeois argued. “That I have a problem with. ... It makes the assumption that there was 100 percent efficiency in the running of the program.” Greater New Orleans Inc.’s report also takes aim at the fact that 40 percent of homeowners with federally backed mortgages who are required to have flood insurance do not. To address this, the reforms increase penalties on banks that do not enforce the rule upon the mortgages they hold. Claudet has bemoaned this point in the past, noting the finances of the program probably would be more healthy had this 40 percent been paying into the program. The report also notes the general lack of understanding of the consequences of the reform. An affordability study was to be completed 270 days after the bill that dictates the reforms became law. That time has come and gone, but FEMA says it has only just begun the study, which is expected to take more than one year to complete. To local officials, this and other actions by FEMA officials appear to be a “slow-play” of the potential consequences. “It is my very firm belief that they have tried to sway public opinion to think that it is not as draconian as it is,” Claudet said.Bourgeois noted FEMA’s choice of examples when explaining the reforms as a “soft-sell.”“I think the examples they have consistently given are a soft sale. They could have picked, from my point of view, examples that are much more applicable,” Bourgeois said. “They do not realize that we have to live where we live and the number of people that will be impacted in this situation.” Read GNO Inc’s full report at http://gnoinc.org/wp-content/uploads/NFIP-Report-FINAL-2013.09.10.pdf.